Leading-edge technology has never been a hallmark of the Securities and Exchange Commission. While investment management has gone hand-in-hand with cutting-edge technology for the past quarter century, information technology typically accounted for just 8% of the Commission's annual budget in 2005, according to TowerGroup.
Rather than invest in IT, the SEC has largely relied on self-regulatory organizations-NASD and NYSE Regulation, prior to the formation last year of the Financial Industry Regulatory Authority-to buy and build systems to identify possible violations. For an agency with outsize responsibilities, its tech footprint has been surprisingly modest.
Then, spurred in part by the Y2K scare and the specter of costly data processing adjustments, the Sept. 11, 2001 terrorist attacks and scandals involving Enron, WorldCom and market-timing abuses by mutual funds, the SEC under Chairman William Donaldson launched major initiatives to become more proactive, efficient and effective at detecting criminals and risk.
"Historically, the SEC had been behind the times in terms of real-time management systems," said private consultant William Thomas, a former branch chief in the SEC's New York office who spent much of his 14 years at the Commission working on new technologies. "They started developing cognizance [of the problem] prior to 9/11. There was a recognition that the SEC did not have all the tools it needed. It was like turning a battleship."
Technology has been central to the vision of a revamped SEC, as reflected in the budget-IT spending grew from $37.9 million in fiscal 2002 to $113 million in 2007, according to the commission, rising from 8% of the total budget to 13% last year. And in January 2004, Corey Booth, a business technology expert and veteran of global consultancy McKinsey & Co., was named director of the office of information technology, an appointment seen by many as key.
In its technology strategy plan for 2007 to 2012, the SEC lists several areas on which it is focusing: the effectiveness of specific programs and core processes, user productivity and the technical environment agency-wide, and IT management.
Program improvements encompass electronic disclosure, discovery and examination, process automation and data warehousing, while the other objectives center on projects in Booth's office, which has overall responsibility for the IT program.
High on the information technology office's agenda is the eXtensible Business Reporting Language (XBRL) enhancement of its Electronic Data Gathering, Analysis and Retrieval (Edgar) system. At its May 14 meeting, the Commission proposed a rule that would require all public companies to submit reports in XBRL on a phased-in schedule over the next three years. Following that, the SEC proposed requiring all prospectus profiles to be made available with XBRL tags.
"If we embrace its potential, it can truly revolutionize the benefits that investors derive from corporate disclosures," Chairman Christopher Cox said at the meeting. "It will enable analysts at the SEC and in private industry to vastly improve their comparative capabilities."
Also a priority is upgrading the Hub-the core tracking system used in enforcement and enforcement management. Introducing the Hub at a roundtable in December, Cox described it as a platform allowing SEC professionals in Washington and the regional offices to share activities in real time.
"It will be a great way for individual attorneys and professionals to interface with the Case Activity Tracking System and the more than 30,000 investigations and inquiries that it holds," he said.
Addressing the Practising Law Institute in Washington on Feb. 8, Cox added that the Hub "will allow division management to allocate professional talent to best fit the needs of each case, and permit us finally to realize the dream of a truly national enforcement program that seamlessly integrates all of the SEC's resources."
Cox also called 2008 "the year of the Phoenix," referring not to the bird of ancient myth but the Commission's updated software system, designed to track disgorgements, penalties and other monies owed to the SEC and investors. Phoenix tracks claims and funds from the beginning of the process until the last dollar is returned to its rightful owner, Cox said. "Ever since the Sarbanes-Oxley Act vastly expanded the SEC's responsibilities in this area, the agency has needed such a system," he noted. "This year, for the first time, we will have it."
Offsite storage has also been beefed up. As consultant Thomas points out, before 9/11, "there was no central driving force" to move ahead with such a program. But the attacks left the New York office "decimated," he explained. "There were tremendous losses of data and paper." Following the tragedy, "there was a recognition that the agency had an opportunity to start over from scratch." Now, Thomas added, the agency has a state-of-the-art offsite storage facility for physical and electronic documents.
Another side effect of 9/11 was that communications drew increased attention. BlackBerry handheld devices were issued to upper and mid-level management, including branch chiefs, key staff members and even some paralegals. "Technology priorities went to staying in touch with one another," Thomas said, adding that he was first issued a BlackBerry in mid-2002.
Standardization of platforms on workstations is another priority. At one time, Thomas said, the SEC would get 700 to 800 trades to analyze. Today, there are tens of thousands-or even millions.
"The SEC had to develop different platforms to sift through all this," he explained. "They were able to identify excellent programs to separate the wheat from the chaff."
Standardized systems will provide less opportunity for people to play with them, Thomas said. "They have policies in place that make it a more secure environment," he added. "That was a major step forward.
"By 2007, the preeminence of the IT section was clear," Thomas continued. "It took on the status of a complete division. Now, the people in IT are professional IT people. They know technology. There is a recognition that IT is crucial for the SEC to fulfill its role."
Peter Delano, research director for securities and investments at TowerGroup, said that the Commission's biggest change since the Needham, Mass.-based firm's 2005 report-"Winds of Change at the SEC"-has been the move toward XBRL.
"To have the SEC develop interactive tools, do a test with mutual fund companies and work on mandating XBRL does several important things," Delano said. "From the SEC's perspective, it streamlines the filing process even further. When you add in XBRL, the SEC can do queries and side-by-side comparisons, and have a common data structure.
"From the investor's perspective," he added, "to be able to get this data, whether you are an institutional research analyst or a self-directed investor, is a big step forward."
Delano also noted that it is important for mutual fund investors to have access to the data without going through the physical financial report or the electronic report. "That makes investors that much more efficient and gives them the ability to perform that much more analysis," he said. "It is beneficial to both sides."
The challenge now is for the data's sources-mutual funds and public companies-to transform their existing process so that they can report in the new format.
Securities Industry & Financial Markets Association spokesperson Travis Larson said his organization is watching the progress of XBRL carefully. "It will affect all issuers. Now, it is more a public company issue than a Wall Street issue," Larson said.
Another important development, according to Delano, is that the SEC's Office of Compliance Inspections and Examinations (OCIE) has put together a small team of technical specialists to assist with examinations. "If you are a financial firm and an examiner comes in, you go to your IT department. The technical specialists can translate for the IT department at the firm under examination, so they can provide data more quickly," he said.
Leonard Driscoll, VP of product marketing at New River, an Andover, Mass.-based technology supplier to financial services firms, approves of the SEC's progress. "The SEC is being very proactive in saying, We need to embrace the Internet more fully,'" Driscoll observed.
With the Treasury Department advocating a merger of the SEC and the Commodity Futures Trading Commission and a move toward that agency's principles-based regulation rather than prescriptive rules, Delano noted that "technology has to play a key role in that evolution. To the extent that the industry is moving quickly with technology, a key part of any plan for modernizing the regulatory framework is also modernizing the technology that regulatory bodies are using. The regulators have to be able to keep up with the speed, complexity and innovation that is taking place within financial services."
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